Europe's number one captive domicile embraces change.
Unless you happen to have been on another planet during the last year to 18 months, I’m sure it has not escaped your attention that there has been a marked transformation in the global economic conditions as we have descended from the previously sunny highs to a much gloomier picture.
Such a sea change presents both threats and opportunities, especially to smaller jurisdictions such as Guernsey, where providing financial products and services is the main driver of the economy. Indeed, out of the credit crunch, there has been an increased focus on so-called tax havens/offshore centres and regulatory standards across the financial markets.
Guernsey markets itself as a low-tax jurisdiction that is fully cooperative in meeting international standards on transparency, regulation and corporate governance. This position has been reinforced by the Island being placed alongside much larger financial centres such as the UK and the US on the OECD ‘white list’ published at the conclusion of the G20 summit in London this April.
The economic conditions have also demonstrated the way in which today, more than ever before, we are part of a global financial community. Guernsey has been clear throughout that it has not exported instability but has been subjected to it, and as a leading international finance centre, we have not been able to remain completely immune from these pressures. However, one of Guernsey’s great strengths is the breadth of finance business that is carried out on the Island. So, while the general downturn is adversely impacting on flows within some sectors, others are seeing an upswing or have identified new prospects as a result of the overall economic environment.
Enter captive insurance
It is generally accepted that soft market conditions, such as those prevailing during recent years, have a limiting factor on the use of captives. Reports suggest that the commercial market will begin to harden towards the end of 2009 and into 2010, because of the changed economic environment in which insurers find recapitalisation more expensive, passing these increased costs on to clients in the form of higher premiums. In fact, there are already clear signs of a hardening of premiums in a number of critical corporate insurance markets. There is growing concern over these hardening rates and the extent of coverage available in the commercial insurance market. This means that now is potentially the time to benefit from a captive and, in particular, to beat the trend before costs escalate.
And where should you domicile the captive? For an offering of strong heritage, innovation and robust yet pragmatic regulation, Guernsey will be the jurisdiction of choice.
A history of growth
The insurance industry in Guernsey has its origins in the 18th century, and captive insurance companies have been incorporatedon the Island since 1922. Guernsey has grown to become one of the world’s most popular domiciles for captive business.
During the past decade, the Island’s international insurance industry has seen sustained growth, and this continued during 2008 despite our maturity, increased competition and difficult market conditions. The changing economic environment coming through from the end of last year and into this year has seen the surrender of some licences on the one hand but also new uptake on the other. For example, the English Football Association (FA ) has established a cell captive with JLT Insurance Management in Guernsey.
Figures from the Guernsey Financial Services Commission (GFSC) show that at the end of June 2009, the number of international insurance entities reached 701, comprising 365 international insurers (286 traditional captives, 67 protected cell companies (PCCs), four incorporated cell companies (ICCs) and eight ICC cells) and 336 PCC cells (258 PCC cells and 78 life policy cells).
Guernsey still plays host to more captives than any other jurisdiction in Europe and is the fourth-largest captive domicile in the world. Our pre-eminence is reflected in the fact that approximately 40 percent of the UK FT SE 100 and 95 of the Global 1500 companies have captives in Guernsey. This status has been enhanced by Guernsey becoming home to Gold Coast City Council Insurance Company Limited—the world’s first local authority captive.
The Island’s list of service providers includes subsidiaries of major companies such as AIG, Aon, Barbican, Catlin, Generali, Heath Lambert, Hiscox, JLT , Marsh, Old Mutual, RSA, SCOR and Willis. Independent boutique operators such as Heritage Insurance Management and Alternative Risk Management (ARM) are also present, providing a holistic environment for insurance solutions.
These firms are seeing increasing diversity both in terms of the risks being covered and the geographical origin of business. A report published by Marsh last year showed that around half of all captives established by UK companies are domiciled in Guernsey. However, in addition to UK companies, firms from Europe, the US, the Middle East, Asia, South Africa, Australia and the Caribbean have established captives in Guernsey.
Guernsey has built a wealth of experience and expertise in providing management and administration of captives. This reputation for quality of service is complemented by the Island’s continued drive for innovation.
A tradition of innovation
Guernsey pioneered the cell company concept in 1997, when it introduced the protected cell company (PCC), and has since also introduced the innovative incorporated cell company (ICC). Today, the Island’s international insurance industry boasts nearly 70 PCCs and more than 330 PCC cells. The number of ICCs and ICC cells coming on stream on the Island continues to rise as both service providers and clients become more familiar and comfortable with the structure.
The Island continues to market the potential benefits of cell company vehicles and, particularly, how the structure enhances the viability of self-insurance for small to medium-sized enterprises (SMEs). In addition, we have been highlighting how changes by the UK to its Controlled Foreign Company (CFC) and Acceptable Distribution Policy (ADP) rules will affect captives and the potential for mitigating this impact on tax payable through the use of cell companies.
It is a tribute to Guernsey’s success that the concept, in various guises, has been replicated by more than 30 other jurisdictions around the world. However, the Island is still recognised as being the pioneer. The Island has also made legislative advancements that have created a regulatory environment that allows for their flexible use. This combination of experience and creativity with cell companies means that Guernsey is leading the way in providing cutting-edge solutions to meet clients’ complex risk transfer needs.
Guernsey continues to develop its infrastructure so as to ensure that it maintains its position as Europe’s leading domicile for captive insurance, while taking advantage of this expertise to encourage other types of business, such as reinsurance, to locate on the Island. At the start of 2009, a licence was issued to Lloyd’s that permits its underwriters to write direct general insurance business (including domestic business) in or from within Guernsey. Barbican Reinsurance Company Limited has already become the first major commercial reinsurer in the domicile, writing a combination of group and third-party reinsurances.
In addition, Guernsey has made several other moves in the last 18 months that showcase its determination to keep hold of existing business and attract new flows:
• A new zero-rated tax regime for licensed insurers
• Modernised company law and the creation of an enviable online company registry
• Updated corporate governance code
• Introduction of Own Solvency Capital Assessment (OSCA).
The GFSC has used a risk-based approach to supervision for many years. A risk rating is currently assigned to each company, based on a set of standard criteria. This approach enables the Commission to focus its resources on the areas of greatest risk and to identify where enhanced supervision may be required.
"The new solvency requirements will take account of the principle of proportionality in its application to smaller insurers and captives."
Since last year, insurers and reinsurers have also been required to submit an assessment of their own solvency position, referred to as an Own Solvency and Capital Assessment (OSCA), following guidance from the GFSC on the risks to be taken into account. We are also considering further development of our solvency regime in line with developing international standards. The application of the solvency requirements will take account of the principle of proportionality in its application to smaller insurers and captives.
We are also currently exploring the possibility of establishing an equivalence agreement with the EU. Such a treaty would help Guernsey captive insurers use EU insurers to front their business, as it would enable the EU insurers to take account of reinsurance placed with the captive for solvency purposes. It would also help Guernsey reinsurers accepting risks from EU insurers or reinsurers.
We are living through a time of significant change in the financial markets. Guernsey is not hiding from but embracing this change to ensure that it retains its position in the very top tier of international finance centres.
Conditions also mean that there are even greater advantages to utilising captive insurance as part of an overall corporate risk management strategy. We have been extremely active this year in pushing out this message and highlighting how Guernsey’s strong heritage, innovation and robust yet pragmatic regulation combine to make us the number one captive domicile in Europe and number four in the world.
All the indicators suggest that this work is paying dividends in a significant way. Local practitioners are saying that there has been a step change in the number of inquiries they have been receiving, and figures from the GFSC show that there were 24 insurance licence applications during the first half of 2009—up by 10 over the same period last year.
Wondering what you’re missing out on? Make Guernsey your first port of call for a captive.
Peter Niven is chief executive of Guernsey Finance—the promotional agency for the Island’s finance industry. Its website is: www.guernseyfinance.com